The OECD has published its Economic Survey of Slovenia for 2015. The survey notes that in pursuit of fiscal consolidation Slovenia has increased value added tax (VAT) and raised excise duties on alcohol, tobacco and fuel. The automatic indexation of tax brackets and allowances for income tax has been eliminated, and measures taken to combat tax evasion and the grey economy. These measures, combined with cuts in public investment, consumption and subsidies and a reduction in the public sector wage bill aim to bring the fiscal deficit down to below 3% of GDP by the end of 2015, and to reach a balanced budget by 2019.

The government plans to increase taxes on financial services and insurance; reverse the abolition of the bank balance sheet tax; increase levies on carbon emissions and levies related to energy efficiency; and simplify tax collection procedures to reduce compliance costs.

Tax Mix

The OECD survey notes that taxes are relatively high in Slovenia owing to the high social security contributions and the progressive personal income tax. A 50% tax bracket has been introduced for individuals earning more than five times the average wage, which means that the marginal tax wedge for high earners is now 66%. The OECD survey suggests that this deters hiring and investment in skills while raising little additional government revenue, and that better results for the labor market could be achieved by reducing the top marginal personal income tax rate.

Recurrent taxation of real estate can support inclusive growth as it raises revenue with relatively limited negative effects on the economy. Slovenia enacted a Real Estate Tax Law in 2014 but this law was repealed by the Constitutional Court. Revenues from taxes on property are well below the OECD average and there is scope to raise more government revenue from property taxes. The Slovenian government is preparing an alternative property tax reform that will satisfy legal requirements and achieve tax policy objectives.

Labor Market

The OECD considers that the relatively high minimum wage relative to the median wage potentially reduces the employment prospects of low-skilled workers. The Law on Minimum Wage provides for annual increases in line with the rate of inflation but according to the OECD there is evidence that earned income tax credits rather than minimum wage increases can support income and employment of lower income families. The OECD therefore suggests that in future increases in the minimum wage should be moderated and that the incomes of low-skilled workers can be protected by social transfers and by tax measures to provide incentives for employment.

Environmental taxes

Environmental taxes amounted to 3.9% of GDP in 2013 and this is one of the highest ratios in the OECD. This partly reflects the high fuel consumption of transit traffic. The effective tax rates are different for different forms of energy. The OECD suggests that Slovenia could improve the effectiveness of these taxes by aligning the tax rates and linking them more closely to emissions. The exemptions for the commercial use of diesel fuel should be removed and tax on heavy fuel oil and gas oil for heating should be increased.

Moving to a better tax system

The OECD survey suggests that Slovenia should move to a tax system that better supports economic growth. Currently the government relies heavily on taxation of labor and consumption while capital and property are relatively lightly taxed. Slovenia’s total tax collection was 37% of GDP in 2013 which is above the OECD average of 34%. In 2013 around 80% of tax revenue came from social security contributions and taxes on goods and services, while revenue from personal income tax was around 14% of total tax collected and corporate income tax was around 3% of collections.

The tax system could be reformed in a revenue-neutral manner to promote economic growth. Taxes on labor could be reduced and this reduction could be compensated by increases in property taxes and changes to consumption tax.

The OECD considers however that there is no room for a reduction in corporate income tax, which has already been reduced to 17% in 2013, the second lowest in the OECD. Some measures have been taken to broaden the corporate tax base. The OECD considers that although low rates of corporate income tax support investment and productivity growth in the medium term the difference between the top personal income tax rate and the corporate income tax rate can encourage high income individuals to shelter their savings within corporation. Further reductions in the corporate tax rate are therefore not recommended.

The OECD considers that a reduction in marginal tax rates on income from labor should be the main priority for tax reform, to increase incentives for work. The marginal tax wedge is high across the whole range of incomes and is well above the OECD average. This wedge could be reduced by a decrease in the top marginal income tax.

This reform could be done in a consistent manner by reducing the eligibility of high earners for social benefits, through better means testing. Some personal income tax deductions could be converted into tax credits, to reduce the financial benefit on higher income earners. Also, tax relief and exemptions could be removed for certain forms of income such as severance pay, pensions and long term capital gains. The flat rate taxation of personal capital income could be shifted to more progressive rates.

Reductions in tax on labor could be funded by increasing consumption tax and reducing tax expenditures. The standard rate of VAT is quite high at 22% but a reduced VAT rate of 9.5% is applied to a wide range of goods and services. This lower rate could be removed from goods and services that are disproportionately consumed by higher income households, for example books, cultural services, hotels and restaurant meals and these could be charged at the standard VAT rate.

Improvements in tax compliance and the shadow economy are also important to maintain tax revenues. The government has addressed undeclared employment through the special online voucher register, and tax fraud has been combated through the stricter rules for using cash register software. The government has also made efforts to improve the tax culture and voluntary payment of taxes.